GREECE: IMPACT OF POLITICAL CRISIS ON ITS PROPERTY MARKET

The German and Italian experiences give clues

A company with a vested interest in boosting holiday home sales claims property prices in Greece will become 50 per cent cheaper for those buying in pounds, dollars and other currencies if the country leaves the eurozone. Those people with an eye for a Greek island hideaway may say "lovely jubbly". But wait, life is not that simple, especially when it comes to the eurozone crisis.

Yes, Greek property may become considerably cheaper if the country exits the euro and a greatly devalued drachma is re-adopted, but that could be the next link in a chain of events that sees it become next to worthless.

In political science there is a theory called Polarised Pluralism. It is not a theory you would want applied to your country. Unfortunately, Greece is becoming a text book example of it. It goes like this - a political system becomes dysfunctional when voters leave the centre ground to support parties at the extreme left and right - there will be little room for compromise, only lots of argument. Such a scenario is destabilising for the economy, financial markets and property market. Following Greece's elections in May, only 40 per cent of voters supported Socialists, liberals and conservatives who occupy that middle ground and accept austerity measures as the price to pay for Greece remaining in the euro. The other 60 per cent mostly supported a collection of extremist left wing and right wing parties, including neo-Nazi Golden Dawn, who reject austerity measures.

Following the failure of talks over the past nine days to form a governing coalition another election will be held in June. Opinion polls suggest more Greeks will go to polar extremes at that election, with far left Syriza, already the second biggest party, topping the poll. What will happen then?

To answer that question, let's look at the two great historical examples of Polarised Pluralism: the Weimar Republic and post-war Italy. The Weimar Republic collapsed when the National Socialist German Workers Party was voted into power in 1933 and created a dictatorship under its leader Adolf Hitler. The rest, as they say, is history. Like Weimar, Greece is experiencing economic catastrophe, a full-blown depression – its economy has contracted by 20 per cent since 2008 and half of its young people are jobless. Weimar had hyper-inflation and mass unemployment. Germans papered their walls with banknotes, they were that worthless. In both cases, democrats could not navigate turbulent economic waters, and were unable to stop extremists entering the political process and dividing the nation.

Syriza is not looking to form a dictatorship, but if it is not willing to accept the terms of the EU and IMF bailout, then Greece will most likely be booted out of the eurozone and bailout funding will cease. This means the government will run out of money to pay public sector employees and Greeks with mortgages and other debts in euros will find them much harder to service in devalued drachmas. These and other economic strains caused by Greece's exit from the euro will lead to greater political instability. An outgoing Greek minister has warned of civil war. Another possibility is the return to military dictatorship - the military ran Greece until 1974. That's the worst case scenario. The Italian experience offers some hope.

Italy had elections almost every year for decades, invariably resulting in shaky coalition governments, sometimes consisting of five different parties or more. Following a series of corruption scandals involving leading established parties, two new blocs of left and right were formed in 2007, and this has created stability, though of a highly idiosyncratic, Italian kind – for example, the right-wing bloc, The People of Freedom, led by Silvio Berlusconi, consists of neo-fascists, Christian democrats, liberals and conservatives. Until 2011 it governed in alliance with Lombard separatists and, some say, the mafia. A UK equivalent would be an alliance of the BNP, SNP, Conservatives, Liberal Democrats, East End gangsters and Church of England. Berlusconi's failure to manage anything seriously except for his hair dye meant Italy went into deep recession and is now run by a government of technocrats. Nevertheless, it is stable.

Modern day Italy and Greece also benefit from something the Weimar Republic did not have: friends. The EU, IMF and European Central Bank, the troika, is attempting to prop up both countries. Greeks say the troika's medicine is killing the patient. However, not even Syriza wants to leave the eurozone, and with anti-austerity politicians sweeping to power in France and parts of Germany, it may be possible for a compromise to be made, to have the austerity pill  sweetened for Greeks by adding debt-free EU structural funds and European Investment Bank support to the bailout package. That's the best case scenario.

Unfortunately, even the best case scenario is unlikely to solve Greece's problems. Only a complete write-off of its debts, including bailout fund repayments, coupled with the structural reforms needed to make it competitive in the world would make it a good place for investment. There is too much opposition from Germany, the banks and others to having Greek debts written-off. While that remains the case, investment in Greece would be an investment in chaos, incompetence and much worse. In other words, avoid, avoid, avoid.